The ECB Should Stay Out of Politics
Has the European Central Bank made itself the judge of which countries remain members of the euro area? That would be an amazing assertion of power -- on the face of it, completely at odds with its usual insistence that it stands outside politics. Yet that is more or less what the ECB seemed to do with its pronouncements on Greek debt last week.
Greece's new government has promised voters not to renew the European Union's bailout program, due to expire at the end of this month. It wants new terms, and a financial breathing-space while they're negotiated. Last week the ECB said that since it can no longer assume a program will be in place, it would stop accepting Greek government bonds and government-guaranteed debt as collateral for lending to Greek banks. After February 11th, it would no longer act as a lender of last resort for Greece.
If that was all there was to it, the ECB announcement would have been tantamount to expelling Greece from the euro system. Greeks have been pulling money out of their banks in recent weeks and months. If a full-scale run developed, and the banks could no longer call on the ECB for liquidity, Greece would need to close its banks and, in short order, begin issuing its own currency. No more monetary union.
As you might expect, it's a bit more complicated than that. For now, the ECB said, Greek banks could continue to access "emergency liquidity assistance" from the Bank of Greece, its local subsidiary. At some point, a supermajority of the ECB's governing council could vote to suspend that privilege as well. Until that happens, Greece still has a lender of last resort -- albeit a quasi-national one, which heightens doubts about the long-term integrity of the euro system.
So what on earth did the ECB hope to achieve with its announcement last week?
The ECB said the move was "in line with existing euro system rules." No doubt that's true: The ECB hasn't broken any rules. But the implication that the rules obliged it to act as it did is also wrong. It didn't need to say anything. That's why the announcement surprised the markets. Note, too, that the governing council was split on the decision. When it comes to liquidity assistance, the ECB largely makes up its own rules about what to accept as collateral. If it wanted to, it could continue to accept Greek bonds as collateral after the bailout program ends. There was certainly no need to announce that, even before the program ends, Greek bonds would no longer qualify.
In a bizarre editorial, the Financial Times greeted the announcement as the ECB's recusing itself from a fraught political stand-off -- as, in effect, an injunction to the politicians to step forward and end the crisis. The more natural interpretation is that the ECB, far from stepping aside, was inserting itself more forcefully into the stand-off, by taking sides against Greece and warning it of dire consequences if it persisted on its present course.
That was a very dangerous move. It caused Greek bond yields and various measures of euro-system volatility to spike. The perceived probability of a Greek exit from the euro was already more than zero; the announcement nudged it a bit higher. It could have been -- and might yet prove to be -- the trigger that causes a full-scale bank run.
How shall I put this? It isn't good practice for a central bank to use the threat of a bank run to enforce fiscal discipline. To be sure, the ECB has ventured into this kind of fiscal enforcement before -- in Ireland and Cyprus -- and, after a fashion, got away with it. That won't be much of a defense if, trying the gambit once too often, the central bank ends up collapsing the system that its president, Mario Draghi, has pledged to preserve.
Whether Greece remains a member of the euro system, and what kind of accommodation the other EU governments will countenance to keep it there, are intensely political questions. The ECB should stay as far away from them as possible. As long as Greece is in the euro system, the ECB should offer its services as lender of last resort -- and that's that.
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